Final chapt 4

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University of Notre Dame **We aren't endorsed by this school
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AA 0P
Subject
Accounting
Date
Nov 19, 2023
Pages
8
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1 Chapter 4: Consolidating Non-Wholly-Owned Subsidiaries Objectives : By the end of this chapter you will be able to: 1. Prepare a consolidated balance sheet at acquisition date under Identifiable Net Assets (INA) and Fair Value Enterprise (FVE) theories (chapter 4) 2. Explain the concepts of negative goodwill and a subsidiary with goodwill on its separate entity statements and how it should be treated when it arises in a business combination (chapter 4) 3. Prepare consolidation eliminating entries in the current period 4. Prepare schedules to aid in the preparation of the consolidated balance sheet Readings : Please read Chapter 4: pages 151 - 168 (focus on FVE and INA theories; Page 171 - 172 (Disclosure Requirements) Summary Notes: This chapter begins an intensive study of the consolidation process. Two important things to note are : 1) In our course we use the Fair Value Enterprise Method (also know as entity theory) to prepare consolidated statements unless told otherwise (text page 161 "cautionary note") 2) Under the FVE method (aka entity theory) we calculate non-controlling interest (NCI) as under example 2, page 159-160 - see text exhibit 4.6 page 161 for NCI calculation). Non-Wholly Owned Subsidiaries and Consolidation Methods (pages 152 - 153) In the previous module: o When one company gains control over another company, it becomes a parent company and the Parent presents consolidated statements for external reporting purposes. o We prepared consolidated balance sheet based on the Parent owning 100% of the sub's net assets or purchase of 100% of the sub's outstanding voting (common) shares. o We learned that consolidated financial statements present the financial position and operating results of a group of companies under common control as if they constitute a single entity. o Under a business combination created through a purchase of the sub's outstanding voting(common) shares, we prepare worksheet entries on the consolidated books to Eliminate the common shares and retained earnings of the sub so that they do not appear on the consolidated balance sheet Set up goodwill and fair value increments/decrements on the consolidated balance sheet Eliminate the Investment in S account since the Investment in S account is represented as the fair value of the sub, now controlled by P
2 In this module: o We introduce the concept of control when the Parent owns less than 100% of the outstanding voting shares of the sub. In this case non-controlling (minority) interest is created; this group of NCI shareholders are the other shareholders of the sub and they co-exist with the Parent as the other group of shareholders in the sub. o We introduce the following methods/theories to measure and report NCI on the consolidated statements for non-wholly owned subsidiaries: a) • Proportionate Consolidation b) • Parent Company Method. c) • Identifiable Net Asset (INA) Method (aka Parent Company Extension Method) d) • Fair Value Enterprise (FVE) Method (aka Entity Method). o We demonstrate the preparation of the eliminating entries at acquisition on the consolidation worksheet when NCI exists. NOTE : 1) We use "example 2" on page 159 throughout the chapter to calculate the value of NCI on the consolidated balance sheet under the FVE and INA methods 2) Our course will only focus on the LAST TWO theories : Identifiable Net Asset (INA) Method (aka Parent Company Extension Method) AND Fair Value Enterprise (FVE) Method (aka Entity Method). 3) See Cautionary Note page 161: Unless told otherwise always assume we use the FVE method. Each of the theories has been or is currently required by GAAP. We will focus only on the two we stated above for our course. Method Status INA model (aka Parent company extension theory) An acceptable method for consolidating subsidiaries after January 1, 2011. FVE model (aka Entity theory) An acceptable method for consolidating subsidiaries after January 1, 2011.
3 Prepare a consolidated balance sheet at acquisition using the direct method under the INA Model (aka parent company extension theory) and the FVE Model (aka entity theory (pages 156 - 163) The FVE and INA models/theories differ in the valuation of the NCI and how much of the subsidiary's value pertaining to the NCI is brought onto the consolidated financial statements. The parent's portion of the subsidiary's value is fully represented under all theories. The NCI's share varies under these two theories as follows: Under the FVE model (aka entity theory) we give equal attention to the controlling and non-controlling shareholders. The acquisition differential consists of 100% of the fair value excess plus the implied value of total goodwill. Goodwill is the difference between the total value of the subsidiary and the amount assigned to identifiable assets and liabilities. On consolidation, 100% of the subsidiary's fair values are brought on to the consolidated balance sheet. NCI is presented as a separate component in shareholders' equity . This is sometimes referred to as the fair value of the subsidiary method, or the full goodwill method. Under the INA model (aka parent company extension theory) , all of the subsidiary's fair value except for the NCI's share of goodwill is brought onto the consolidated balance sheet. NCI is based on the fair value of identifiable assets and liabilities. On consolidation, 100% of the subsidiary's fair values of identifiable assets and liabilities; only the parent's share of the subsidiary's goodwill are brought onto the consolidated balance sheet. NCI is presented in shareholders' equity. TIPS: When reviewing this section: 1) Note the authors' comment on page 160 in the last box: "In this text we will assume a linear relationship to calculate the value of NCI except when we are given the market price of the sub's shares held by NCI shareholders" ; you will see that in the majority of the problems they use the implied value approach. 2) Follow the example in the text (data begins on page 152). Use it to follow the preparation of the consolidated balance sheet at acquisition date under the FVE model pages 156-157; 158-161: use example 2 on page 159 - 160 to calculate acquisition differential and goodwill under both FVE page 159 - 160 and INA pages 161 - 163 a. Note on pages 161 and 162 the preparation of the consolidated balance sheet using the direct method at acquisition date. We don't show the common shares and retained earnings of the sub as well as the Investment in S account b. The preparation of the consolidated balance sheet involves: i. eliminating the parent's investment account and the subsidiary's shareholders' equity accounts, ii. re-valuing the net assets of the subsidiary to fair value, and establishing the non-controlling interest (NCI) in the fair value of the subsidiary's net assets. c. Steps to follow when preparing the consolidated balance sheet: i. Calculate the acquisition differential and goodwill ii. Calculate NCI at acquisition date iii. Prepare the acquisition eliminating entry to:
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